German Inflation-Linked Bonds: Overpriced, Yet Undervalued

Christensen, Jens H. E.; Mouabbi, Sarah; Paulson, Caroline M.

doi:10.24148/wp2025-03

Working Paper

German Inflation-Linked Bonds: Overpriced, Yet Undervalued

Abstract: We document that German inflation-linked government bond yields contain a convenience or safety premium averaging 0.33 percent. Yet, the German Federal Finance Agency decided to cease all future issuance of these bonds in November 2023. We examine the market response to this announcement and find that neither the safety premia nor the trading conditions of these bonds have been negatively impacted. Hence, this bond market remains a rich source of information on real rates in the euro area in addition to offering investors a safe inflation-protected asset.

Keywords: affine arbitrage-free term structure model; financial market frictions; premium; rstar; safety premium;

JEL Classification: C32; E43; E52; G12;

https://doi.org/10.24148/wp2025-03